Meal and Entertainment Deductions under New Tax Law
The Act changes section 274, concerning the disallowance of
deductions for certain entertainment expenses, by limiting the circumstances in which a
deduction may be taken. Under the new law, the carve-out language allowing deductions
related to the taxpayer’s trade or business has been stricken, preventing taxpayers from
taking any deductions for entertainment, amusement, or recreation expenses, regardless
of the circumstances under which the expenses arise. The Act also strikes several related
provisions, including provisions related to the substantiation of deductions, which are no
longer necessary with respect to entertainment expenses.
While the Act did not eliminate the 50% deduction for food and beverage
expenses, the Act did eliminate other deductions related to the provision of meals and
lodging to employees. Under prior law, employers operating a qualified eating facility,
established to provide employee meals, were eligible to deduct the direct operating costs
of the facility, including the cost of food and beverages, as well as personnel expenses.
Additionally, prior law allowed employers to deduct the cost of meals furnished to
employees on the employer’s business premises. However, the new law disallows both
of these deductions.
Finally, the Act eliminates an employer’s deduction for the expense of any
qualified transportation fringe. This includes any employer-provided costs for public
transportation to and from work, transit passes, and qualified parking. Additionally, the
Act disallows deductions for any payments or reimbursements provided by employers for
transportation, except as necessary for “ensuring the safety of the employee”, a phrase
which is not further explained or defined by the Act.
While it is unclear how impactful these changes will be on
business activities, it is likely that small businesses will be affected the most, as larger
businesses are more easily able to accept the cost of meal, entertainment, and travel
expenses. It is also unclear to what extent these costs will be passed on to employees,
who in certain circumstances may no longer receive the benefits associated with
employer-provided services that are contingent on the employer’s ability to deduct its
***Because of the complexity of the new tax law, further review and a more detailed analysis will be necessary before we have a complete understanding of the new laws. We plan to have this completed no later than June 30th. In the meantime, if you have any questions regarding this or if you have any other tax concerns, please contact Morey Glazer at 972-385-0007 or by email at firstname.lastname@example.org.***